The S&A Digest: Intel's Down

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 06/24/2013

Intel's down... The Fed at work... Why gold will go higher... Greg Reyes goes to jail, Steve Jobs to follow... Tracking hedge-fund portfolios... Death bonds... Whitman on video... An ethanol Ferrari... It's never your fault (in America)...

As at least some of you know, Intel has been a core recommendation of my newsletter, PSIA, since early 2006. Sales fell short of expectations in the fourth quarter, and the company gave a tepid forecast for 2008 – which seems sensible given the macro headwinds that the world seems to be facing.

I don't have a forecast for global semiconductor sales in 2008 or 2009, but I didn't when I recommend Intel, either. I recommended Intel because it is the world's leading semiconductor company, it was incredibly cheap (and is incredibly cheap again), and I'm certain that in the future the world will buy more semiconductors than it does today. In other words, you don't have to be right about too many things to do well in Intel over time. So... do I care that the stock has pulled back? Not really. We bought at a great price ($19.35). Even after falling close to 30% from its high, Intel is still trading above where I first recommended it. Should you buy it now? Only if you're looking for a super high-quality, blue-chip company. And only if you're reasonable about the likely future returns and your holding period. Buying now, I think you're likely to make around 20% a year (on average) over the next five years.

According to the government, consumer price inflation grew 4.1% in 2007 – the most in 17 years. We'd argue this figure dramatically underestimates the real cost-of-living increases in the United States, thanks to certain subjective adjustments the bean counters feel entitled to make. Ask any business owner how much his expenses rose last year, and the answer you'll get is much closer to 10% than 4.1%.

You might reasonably wonder why prices are headed higher, despite what various measures indicate is a slowing economy? There is one, and only one reason, dear subscribers: the actions of our own Federal Reserve. This morning the Fed "loaned" its member banks another $30 billion for 28 days at an interest rate of only 3.95%. I put "loaned" in quotes, because today's giving follows the $20 billion disbursed on December 20. And all of this "lending" is in response to the horrendous amounts of capital lost in various mortgage schemes.

When a loan isn't repaid and is only followed with another, larger loan... it's not really lending, is it? Besides, even your grandchildren would be able to calculate this rate of interest (3.95%) is less than the present, official rate of inflation and far less than any bank could borrow money with in the markets today – that is, if they could borrow at all. Don't you wish there were an entire federal agency dedicated to erasing all the mistakes you've made as an investor with collateral-free, below-market-interest-rate loans, which need not ever be repaid?

How long can this game continue? Alas, we don't have a crystal ball, despite what our marketing department might claim. We only know as long as the Fed continues to pump huge amounts of money into the banking system at interest rates far below the market rate, buying hard commodities – especially gold – is very likely to be a great bet.

Gregory Reyes, the CEO of Brocade and the first executive convicted of backdating stock options, received a 21-month prison sentence today. We first began reporting on the gross abuses of stock options in 2002... and were roundly criticized as "crackpots" for doing so. Although the market has seen fit to forget about it, Steve Jobs, the CEO of Apple and formerly of Pixar, is just as guilty as Gregory Reyes.

Here's an interesting website. It allows you to quickly see which institutional investors (hedge funds, mostly) are doing well at the moment – and to see most of what's inside their portfolios, as of their last quarterly SEC filing.

If you think we're too bearish lately, don't read Jeremy Siegel's latest. Siegel sees U.S. equities falling another 30% over the next 10 years.

Have you ever heard of "death bonds"? These insurance contracts pay as much as 5% above benchmark interest rates (like LIBOR), unless a pandemic increases the death rate by a specified amount, usually around 20%. If there's a huge new world war or a raging global virus, then you have to pay insurance claims related to catastrophic loss policies. How likely is such a pandemic to occur? One death bond investor says, "The kind of event needed to trigger an extreme mortality bond would involve so many deaths that I'm not sure I would survive it myself. Neither 9/11 nor World War II would have triggered the existing mortality bonds."

Bond insurer Ambac is joining MBIA in a struggle to keep its AAA rating. The world's second-largest bond insurer is losing its CEO, cutting its dividend 67% to $0.07, and raising $1 billion in new capital. Ambac will write down as much as $3.5 billion in bonds.

Despite the credit crunch, hedge funds are swimming in cash. A record $194.5 billion flowed into the industry this year, up from $126.5 billion in 2006.

Signs of a top in ethanol: Ferrari released a concept car fueled by E-85 (a mix of 85% ethanol and 15% gasoline), the F430 Spider Biofuel.

Marty Whitman is one of the true deans of the professional value-investing community. His strategy of "safe and cheap" is contrasted with the Graham and Dodd approach in this presentation he gave last year at the Richard Ivey School of Business in Ontario. If you're a student of investing, and you've never heard Whitman explain his theory, you should watch.

New highs: CurrencyShares Japanese Yen (FXY).

In the mailbag: Some subscribers, it seems, understand that we're not managing their money, only supplying them with ideas and research so they can manage their own affairs. That is, after all, our role. We sell research. Nevertheless, we are a bit shocked that anyone in the United States retains a sense of personal responsibility. Apparently these folks have never consulted with a plaintiff's attorney. They don't know the new American motto: Nothing is your fault.

We read all of your notes, whether they surprise and delight us... or whether they make us want to rip our hair out and defenestrate our computer. Send your feedback here: feedback@stansberryresearch.com.

"I have an uncle. He's an investor. He manages not only his own rather extensive investments, but also those of his church, a responsibility which he takes very seriously. Occasionally, we share investment ideas, and some of the ideas which I run by him come from S&A recommendations, among other sources. All in the family, right? Sometimes, one of those investment ideas goes south, and I feel compelled to send off an apology to my uncle. Invariably, he responds in this manner – 'Hey, don't worry! I went into that one with my head up, did my own research and made my own choice. That makes it my responsibility, not yours...' In this 'victim society' of ours, blaming someone else for our own mistakes teaches us absolutely nothing. It's a matter of personal choice and individual responsibility. Your recommendations offer value to me for one simple reason. They narrow the fields of my own research. I am not a professional, and I do not have enough time in a day to start from scratch. Your recommendations point me down roads which otherwise might not have been taken, and for that you have my gratitude. For what happens thereafter, or does not, I will take personal responsibility." – Paid-up subscriber WKT

Porter comment: What you write is absolutely true. We don't accept any of the credit or any of the blame for the results our subscribers achieve. On the other hand, we take full responsibility for the track records of our products, and we're committed to tracking them – honestly – for our readers.

As you've seen through the years, when our people or our products don't measure up, we make changes – and quickly. Unlike a few other publishers we know, we're not interested in selling products that only sell well but don't do well for readers.

"While you have racked up 9%, 12%, and 14% this year, I've quadrupled my portfolio since March, 2007. I have held a few of your recommendations over the course of the year, but your insight has been priceless... While I am sure you are skeptical of my claim of 'quadruple' of my portfolio, I would be willing to share my account history with Porter. My advice to fellow investors/traders, find out what kind of investor/trader you are, get as much education as you can, and subscribe to the best newsletters you can. Use your own 'Critical Thinking' as your guide. As a side note, the Chateaunuf Du Pape was a Christmas high note. In case you were wondering, the only thing I smoke up here in northern Michigan is salmon, and venison jerky." – Paid-up subscriber T.M.S.

I don't expect you to have a crystal ball, but you must be aware when the market is about to take a dump and should let us know so we can at least move our stop losses up closer, if nothing else..." – Anonymous

Porter comment: We have one permanent position about the future of the stock market: It will fluctuate. The only (and best) advice we can offer about what is likely to happen in the future is what Warren Buffett says: Try to be cautious when you see other people being greedy and try to be greedy when you see other people being cautious.

Regards,

Porter Stansberry

Baltimore, Maryland

January 16, 2008

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